Question #1 Briefly describe (one paragraph each) the basic operations of— and t
ID: 2752466 • Letter: Q
Question
Question #1 Briefly describe (one paragraph each) the basic operations of— and the products and services offered by—each of the following financial institutions: (a) commercial bank, (b) savings and loan association, (c) savings bank, (d) credit union, (e) stock brokerage firm, and (f) mutual fund.
Question #2 Michelle and Ken Dunn, both in their mid-20s, have been married for 4 years and have two preschool-age children. Ken has an accounting degree and is employed as a cost accountant at an annual salary of $62,000. They’re now renting a duplex but wish to buy a home in the suburbs of their rapidly developing city. They’ve decided they can afford a $215,000 house and hope to find one with the features they desire in a good neighborhood.
The insurance costs on such a home are expected to be $800 per year, taxes are expected to be $2,500 per year, and annual utility bills are estimated at $1,440—an increase of $500 over those they pay in the duplex. The Dunns are considering financing their home with a fixed-rate, 30-year, 6% mortgage. The lender charges 2 points on mortgages with 20% down and 3 points if less than 20% is put down (the commercial bank the Dunns will deal with requires a minimum of 10% down). Other closing costs are estimated at 5% of the home’s purchase price. Because of their excellent credit record, the bank will probably be willing to let the Dunns’ monthly mortgage payments (principal and interest portions) equal as much as 28% of their monthly gross income. Since getting married, the Dunns have been saving for the purchase of a home and now have $44,000 in their savings account.
a. How much would the Dunns have to put down if the lender required a minimum 20% down payment? Bearing in mind closing costs, could they afford it?
b. Considering only principal and interest, how much would their monthly mortgage payments be? c. What home insurance coverage amount would you recommend? Any additional home insurance endorsements you would recommend?
d. Considering the Dunns do not have any life insurance, what amounts and type(s) would you recommend for the couple?
Question #3
a. Describe credit scoring and explain how it’s used in making a credit decision.
b. What steps can you take to establish a good credit rating? List and explain at least 3 such steps.
c. What are some key factors you should consider when choosing a credit card? List and explain at least 3 of them.
Question #4
a. Describe the DJIA, S&P 400, S&P 500, NASDAQ Composite, Russell 2000, and Dow Jones Wilshire 5000 indexes. Which segments of the market does each measure track?
b. Describe the concept of asset allocation and explain how it works.
Question #5 Elena Diaz is 57 years old and has been widowed for 13 years. Never remarried, she has worked full-time since her husband died—in addition to raising her two children, the youngest of whom is now finishing college. After being forced back to work in her 40s, Elena’s first job was in a fast-food restaurant. Eventually, she upgraded her skills sufficiently to obtain a supervisory position in the personnel department of a major corporation, where she’s now earning $58,000 a year.
Although her financial focus for the past 13 years has, of necessity, been on meeting living expenses and getting her kids through college, she feels that now she can turn her attention to her retirement needs. Actually, Elena hasn’t done too badly in that area, either. By carefully investing the proceeds from her husband’s life insurance policy, Elena has accumulated the following investment assets:
Money market securities, stocks, and bonds $72,600
IRA and 401(k) plans $47,400 Other than the mortgage on her condo, the only other debt she has is $7,000 in college loans.
Elena would like to retire in 8 years, and she recently hired a financial planner to help her come up with an effective retirement program. He has estimated that, for her to live comfortably in retirement, she’ll need about $37,500 a year (in today’s dollars) in retirement income.
a. After taking into account the income Elena will receive from Social Security and her company-sponsored pension plan, the financial planner has estimated that her investment assets will need to provide her with about $15,000 a year to meet the balance of her retirement income needs. Assuming a 6% after-tax return on her investments, how big a nest egg will Elena need to earn that kind of income?
b. Suppose she can invest the money market securities, stocks, and bonds (the $72,600) at 5% after taxes and can invest the $47,400 accumulated in her tax-sheltered IRA and 401(k) at 7%. How much will Elena’s investment assets be worth in 8 years, when she retires?
c. Elena’s employer matches her 401(k) contributions dollar for dollar, up to a maximum of $3,000 a year. If she continues to put $3,000 a year into that program, how much more will she have in 8 years, given a 9% rate of return? [Do not factor in the amount she already has in her 401k.]
d. Assuming she has not done any estate planning, what would you recommend she do immediately? Explain.
Explanation / Answer
1)a)commercial bank is a financial institution that accepts deposits from clients and make loans to businesses and other purposes.Core products and services includes accepting money on various types of deposits accounts,lending money in the form of cash by overdraft or loan,lending money in documentary form as letter of credit,guarantees,cash management,Treasury management,private equity financing and processing payments via telegraphic transfers or internet banking,act as trustee or attorney,to deal in forex,merchant banking facility.
b)savings and loan association are financial institutions that specializes in accepting savings deposits and making mortgage and other loans at a competitive rate as compared to commercial banks.These associations are very similar to commercial bank with limitations on the type of services it can offered otherwise core services offered almost remains the same as of commercial banks.The savings and loans are mutually owned by its members with no need to pass profits to the third party.
c)A savings bank is a financial institution that specializes in accepting savings deposits and paying interest on those deposits.Thus they channel the savings of the depositors to those who who wants them.Their main function thus is to assemble the capital of the community lend it to more needy borrower in form of loans.They provide for safe outlet of funds with peace and comfort for the society.They promote thrift.It provides for electronic fund transfer to other peoples accounts.It provides immediate funds when and required through ATMs.
d)credit union is a member owned financial institution,controlled by its members providing competitive credit rates and other financial services to its members.Credit unions differ from Banks in that those who have accounts in the credit union are also its members.
(e) stock brokerage firm is a financial institution that provides for buying and selling of securities between the buers and the sellers.In addition to buy and sell business these firms provides for researching the markets to provide for appropriate buy and sell recommendations.
f)mutual fund is a professionally managed fund that pools money from many investors to invest in a fund.Are sometimes referred to ass investment companies.Mutual funds are in four main categories as money market ,fixed income,equity and hybrid funds.
3a)credit scoring is a process whereby a credit score is assigned to a potential borrower based on the credit report information,the income,debt ratio and other financial aspects of the borrower.Based on the credit score the loan is granted ,a borrower meeting the minimum credit score criteria is offered the credit.
b)1) Remove the other outstanding nuisance balances on credit cards and reduce the number of credit cards by paying the small outstanding amounts on the credit cards so that only small number of credit cards on which balances are there remains.
2)Do not close old debt accounts that have a solid payment track by you because that helps to improve the credit score.Its viable to close Debt accounts on which you have weak repayment record by paying off outstanding balances.
3)Not doing something that can jeopardies the credit score like missing on payments and suddenly paying less than u normally do.
c)1)Spending habits,if you are a type of person who can pay the bill month by month then interest rate doesn't matter much but if you are going to carry over balances than you want the lowest interest rate possible for the credit card.
2)The interest rate can be fixed or variable interest rates ,variable interest rates can vary and change ,the fixed rate can also change when the borrowing crosses limits or when there is non payment.So its always viable to choose the type of interest rate you want to pay because that can determine your ultimate pay.
3)The credit limit is the maximum amount of money the credit card is willing to let you borrow.Depnding on the credit history it can be anywhere from few dollars to thousands of dollars.